Weekly Market Review - Insights | Affin Hwang Asset Management

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A Brief on Global & Local Markets, Investment Strategy.

Week in Review |27 – 31 july 2020

Global Markets Mixed on Weak US GDP

Global markets ended mix last week following the release of the US GDP data which showed a sharp contraction in 2Q2020. The S&P 500 index edged 1.7% higher as the US Federal Reserve left interest rates unchanged at near zero and maintained its accommodative stance. In Asia, the MSCI Asia ex-Japan index closed 2.1% higher, whilst the Hong Kong Hang Seng index shed 0.4%.

Other Macroeconomic News

United States:

The 2Q2020 GDP print shrank by an annual rate of 32.9%; marking its sharpest economic contraction since the second world war.
Economists expect the US economy to improve in 2H2020. The 7-day moving average of daily infections have dropped to 63,000 from its peak of 69,000. Other indicators including number of clinic visitations have also come down according to recent data.
Weekly jobless claims came in at 1.43 million last week, suggesting that the recovery of the labour market will be a challenging one. The upcoming NFP report slated to be released coming Friday will be one to look out for.
The extension of the weekly USD600 aid for the unemployed is expected to be finalised this week; though the Republicans are pushing to reduce the amount to mitigate the risk of people opting not to return to work.
With interest rates expected to hover at low levels, the focus will be on the Fed’s forward guidance when the FOMC convenes in September 2020.

Europe

Germany’s GDP shrank by 10.1% quarter-on-quarter; it’s largest decline since 1970.
France’s economy shrank by 13.8% in the quarter in wake of pandemic restriction and lockdowns.
Italy is set to increase its stimulus package to EUR32 billion to further combat the impact of the pandemic.

Earnings season is also underway with more than 60.0% of companies in the US S&P 500 releasing their results. Of these companies, more than 80% delivered a strong earnings beat. In terms of magnitude, the reported resulted were seen beating analysts’ expectations by over 20% on average. The big earnings beat is partly attributed to overly conservative expectation during the current pandemic.

However big tech stocks including Facebook, Amazon and Apple rallied after reporting a surge in their quarterly results. Tech companies have been leading gains in the US stock market despite the slowdown in the economy due to COVID-19.

Meanwhile, geopolitical tensions simmered following comments by US President Donald Trump that he will move to ban Chinese-owned video app TikTok in the US. TikTok is owned by Chinese tech firm ByteDance and has grown in popularity over the years, especially among younger users. Trump’s comments come following reports that Microsoft has held talks to buy over the US operations of TikTok. A decision on the acquisition will be made in mid-September according to reports.

On portfolio action, we added some weight in semiconductor and hardware tech names including Samsung Electronics which have continued to perform well.

Updates on Malaysia

On the domestic front, the local market treaded water with the benchmark KLCI barely unchanged at 0.9%. It was a packed week with Malaysia politics and courtroom news for investors to digest.

Former Prime Minister Datuk Seri Najib Razak was found guilty by the High Court of all seven charges of abuse of power, criminal breach of trust and money laundering in relation to RM42 million belonging to SRC International Sdn Bhd, a former subsidiary of 1MDB. His conviction basically weakens his political standing within UMNO and would effectively prevent him from standing in the next general election.

This triggered UMNO to not formally join the Perikatan Nasional (“PN”) coalition, where Datuk Seri Ahmad Zahid Hamidi said in a statement that the party will instead strengthen its Muafakat Nasional (“MN”) pact with PAS, and the other component parties of Barisan Nasional (“BN”). However, he also mentioned that they would continue to pledge its support to the federal government.

Our base-case is that the current coalition will stand, with such moves seen more as market/political noise. Whilst the risk of snap elections is still likely, there is incentive for both PN and the opposition coalition Pakatan Harapan (PH) to delay snap elections to settle any internal disputes and to get their house in order first before seeking a fresh mandate.

Lastly, political wrangling in Sabah has resulted in the dissolution of the state government, with a state election to be decided within 2 months.

In other news, Prime Minister Tan Sri Muhyiddin Yassin announced that banks will offer a 3-month loan moratorium extension and assistance to targeted groups. The move is expected to benefit some three million individuals and businesses, particularly those who suffer pay cuts and are unemployed due to the Covid-19 pandemic, according to The Edge.

Meanwhile, an announcement by the Human Resources Ministry that it would limit the hiring of foreign workers to only 3 sectors namely construction, plantation and agriculture drew criticism from stakeholders. The proposed policy is part of the ministry’s move to encourage hiring of locals and reduce dependence of foreign labour, but is not an official stance taken by the government.

On portfolio positioning, we trimmed our position in politically-linked stocks (e.g. Datasonic, MyEG) while continuing to ride on our winners i.e. gloves and tech sectors. We maintain a cautious outlook with politics remaining a clear overhang for markets.

Fixed Income Updates & Positioning

The Asian credit space posted a relatively solid outing last week as fund flows continued to pour into the region in search for more attractive yield offers. Credit spreads for regional names further compressed in the week; sitting at just 185 bps for IG names on average, and close to 700 bps for the HY segment.

On the back of robust demand and liquidity, activities on the primary front showed no signs of slowing down; adding on USD7.7 billion worth of new issuances last week (from USD5.5 billion in the week before) that are spread out quite evenly between IG and HY names. Demand and participation for these new issuances is strong with an oversubscription of 3.0x to 7.0x for selective names. Trading on the secondary front have also been firm over the week, with particular interest towards 5- and 10-year Chinese IG names such as SINOPEC and China Mengniu among others.

In terms of portfolio positioning, we have been redeploying our cash into the primary side over the past month and we remain confident with the current holdings of our global / regional funds. Currently, majority of our Asian portfolios are more than 90.0% invested and slightly overweight on duration.

Back home, local government bonds continued to advance on the back of month-end buying flows from both local and foreign players as MGS yields trended lower by 5 to 7 bps across the curve.

Albeit news of higher fiscal deficit as well as the larger supply of government bonds in 2020, govvies in general have enjoyed notable traction over the course of July 2020; as the spread between MGS yields and the Overnight Policy Rate tightened further in the month. The 30-year MGS yield declined by 45 bps month-on-month whereas the 3-year MGS yield declined by some 30 bps over the same period. The 10-year MGS benchmark yield ended the month at 2.55% which is 31 bps lower from its previous monthly close.

In terms of activity on the primary market last week, the local market was greeted with the reopening of a 7-year GII of RM4 billion in size. The new GII saw a healthy bid-to-cover ratio of 2.0x and was closing yield of 2.28%. The corporate segment also saw two names tapping into the market last week, including:

Tenaga Nasional Berhad – issued RM3 billion across 2 tranches, a 10- and 20-year, which was priced at 2.90% and 3.55% respectively. Subscription was a healthy with a bid-to-cover ratio of approximately 3.0x.

Gamuda Land – issued RM600 million across 3 tranches (5-, 7- and 10-year), in which a portion of the money raised will be used to repay their Bandar Serai bond which is due for maturity coming October 2020. These new corporate guaranteed issuances of 5-, 7- and 10-year was priced at 3.55%, 3.75% and 3.90% respectively.

Treading ahead, we expect upcoming supplies to remain well propped-up. Some of the new issuances that are expected to be rolled-out in the coming weeks include that from Celcom, IJM, as well as Maybank among others.

Portfolio action wise, we have continued to redeploy into govvies as well as credit names that are comfortable with. Cash position for our Malaysian fixed income portfolios currently ranges between 5.0% and 10.0%.

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